Director's report Risk management

Risks to operations

Business cycle sensitivity

The state of the global economy affects general demand for IT services. A weak economy in Sweden or internationally may result in lower-than-expected market growth for IT services. So, a weak economic trend may negatively affect Cybercom's sales and profits.

Customer focus

In 2007 Cybercom had about 120 active customers; about 50 generated revenue for Cybercom of more than SEK 1 million each. Cybercom now has frame agreements (master contracts) in all major business relationships. Although Cybercom's customer base is well diversified, a situation in which several major customers terminate their frame agreements or stop or partially reduce their purchases from Cybercom cannot be ruled out. The number of and sales from telecom customers represent a significant proportion of Cybercom's total customers and sales. If the above events occur, then Cybercom cannot guarantee that it will be able to establish new customer relationships to the same extent, which may adversely affect sales and profits.

Competitors

Cybercom offers business-critical solutions, mainly in telecom and selected technologies. Competition is strong in this market. High market volatility means that players, offerings, and pricing models constantly change. It is very important for a company to establish a niche and position itself in relation to other players to create its own customer base.

Some competitors have larger financial and industrial resources than Cybercom, enabling them to influence pricing in the market. It cannot be ruled out that greater competition may lead to less market share and profitability for Cybercom.

Integration

The auSystems and Plenware acquisitions entail integration of previously independent operations that partly competed in the same market. Difficulties in combining the operations include the necessity of keeping staff, and co-ordinating geographically widespread operations, systems, and facilities from operational, financial, and legal perspectives. Alongside daily operations, Cybercom's management will devote considerable attention and time to the integration. Possible integration-related delays or difficulties may negatively affect Cybercom's operation, profitability, and financial position.

Recruitment and skills

Cybercom's operation depends on the motivation and skills of its employees. Qualified consultants are a prerequisite for successfully implementing customer projects and satisfying customers. In recruitment, Cybercom sets high requirements on skills and experience and works actively to secure the future level of staff expertise. In some periods, there may be a labour shortage and Cybercom may face recruitment difficulties. If the company fails to recruit and keep qualified consultants, this may adversely affect its operation, profits, and financial position.

Key people

Several key executives are crucial to Cybercom's business. They contribute advanced expertise and extensive experience, which are important to Cybercom's development. One or more of these key employees leaving Cybercom could be detrimental to the company's operation and profits.

Contractual relationships

As mentioned, Cybercom has frame agreements with all its major customers, but most agreements lack volume commitments and have relatively short terms of notice. Some of Cybercom's contractual relationships are not formalised in written agreements. In customer relationships Cybercom sometimes relies on customary practice between the parties. The content of such agreements may be difficult to clarify if the parties disagree on it, which in the worst case may lead to deterioration of relationships and costly disputes.

This could negatively affect the company's operation, profits, and financial position.

Staff costs

Salaries, other remuneration, and social costs form Cybercom's largest single cost item. Pay rises following overheating in the IT consultant market in Sweden and in the countries where Cybercom has subsidiaries may lead to weakened Group profits.

Loss carry-forwards

Several of Cybercom's subsidiaries have previous losses that may be used in certain circumstances to offset profits in other Group companies - above all several of the companies acquired from auSystems AB in April 2007. There are limitations in the rules for use of loss carry-forwards, such as for recently acquired companies. This may prevent or restrict use of previous losses in Cybercom's subsidiaries.

Legal disputes

Currently, the company is not involved in any legal disputes. There is a risk of Cybercom becoming involved in such disputes in the future, and a negative outcome for Cybercom in one or more of them could adversely affect Cybercom's operation and financial position.

Owner with considerable influence

JCE Group AB owns a substantial proportion of all outstanding shares. This shareholder has the option of exercising considerable influence on matters that require the approval of shareholders, including appointment and removal of board members; any proposals for mergers, consolidation, or sale of all or the main part of Cybercom's assets; and other company transactions. This concentration of ownership could limit other shareholders' opportunities to exert influence.

Sensitivity analysis

This summary shows the effect on operating profit/loss of a 1% change in certain factors, calculated on the 2007 outcome:

Reported effects should be seen independently of each other, and they presume that other factors do not change.

Financial risks

Currency risk

Cybercom is exposed to currency risk, mainly through translation of the year's profits and net assets from foreign subsidiaries in Europe and Asia (translation risk). The Group's profits and net assets are exposed to translation risks in Danish kroner, Polish zlotys, Singapore dollars, UK pounds, and Indian rupees. The Group's net inflow of foreign currency mainly comprises the euro and US dollar. Currency exposure means that Cybercom's future competitive strength may be weakened, which may negatively affect growth and profit level.

Interest risk

Interest risk is defined as a decrease in profits caused by a change in market rates. The bulk of Cybercom's debt financing is subject to variable interest in Swedish kronor. Cybercom's debt financing is a risk in itself: an increase or decrease of one percentage point in the market rate affects the Group's profit after tax and equity by about SEK 4 million in a 12-month period. The Group's revenue and cash flow from operations are essentially independent of changes in market rates. The Group has interest-bearing assets in the form of bank deposits.

Financing risk

Financing risk is defined as the risk of it being difficult and/or expensive to obtain financing for the operation. If Cybercom does not develop as planned, a future situation in which Cybercom must acquire new capital cannot be ruled out. It cannot be guaranteed that additional capital can be obtained on favourable terms for Cybercom's shareholders or that such an addition of capital, if obtained, will be sufficient to achieve Cybercom's strategy. If Cybercom fails to obtain requisite capital in the future, continuation of its operation cannot be guaranteed.

Credit risk

Historically, Cybercom has had very low credit losses. Most of the Group's customers are large, well-reputed companies, authorities, and organisations with high credit ratings. Cybercom cannot guarantee that credit losses will remain at the same low level in the longer term.

Share-related risks

A potential investor in Cybercom should note that an investment in its share involves risk and that there are no guarantees of any increase in the share price. Besides development of Cybercom's operation, share price development depends on a series of factors beyond Cybercom's control. They include the general economy, the market interest rate, alternative return options, capital flows, and political uncertainty. Although Cybercom's operation is developing well, there is risk of an investor incurring a capital loss when selling shares.